State defers schools, welfare program payments

Written by: Wyatt Buchanan,  Chronicle Sacramento Bureau

K-12 Content Courtsey Trane

State leaders on Monday used a recently passed law to delay payment of nearly $3 billion in funds to K-12 public education and a welfare program, a decision that officials acknowledged will exacerbate difficulties for school districts and counties that already have had to lay off workers.


The move transfers part of the state's money shortage crisis to counties, school districts and local officials, who will be left to decide how to bridge the gap to continue providing services to the public.

"Essentially, this is ... the state pushing its cash management to local districts," said Jack O'Connell, the state superintendent of public instruction, adding that in the past few years, "schools have not only taken a hit, they've taken a massive hit."

Districts feel pressure

What the decision means for schools, which will not receive scheduled payments from the state in September totaling $2.5 billion, will vary by district but many will have to borrow the money from the private market and pay it back with interest, O'Connell said.

Troy Flint, spokesman for the Oakland Unified School District, said, "This wasn't unexpected, given California's budget woes, but as with most decisions coming from Sacramento recently, it puts more pressure on local districts to compensate for shortcomings at the state level."

Jean Hurst, a lobbyist for the California State Association of Counties said the delay in receiving $400 million in welfare dollars for counties will probably also result in counties having to borrow cash to make up the difference.

She said she doubted services would be affected, but said, "this is just another component that makes it more complicated. ... (It's) additional bailing wire and duct tape to put the budget together."

Karen Mitchoff, spokesperson for the Contra Costa Employment and Human Services Department, said deferred payments from the state, "would be devastating to the delivery of services at the local level. Any deferment of payments to the county means that we have to scramble for money in order to pay our obligations."

The decision to defer the payments was made by the state controller, treasurer and director of the Department of Finance, who wrote a letter Monday to legislative leaders saying that the state would delay for up to three months $2.9 billion that is owed to school districts and to counties to administer the state's welfare-to-work program, CalWORKS.

Delay to keep cash

The governor signed a law earlier this year allowing for delays, called deferrals, in order to keep some cash in California's coffers during fiscal emergencies.

Besides Monday's decision to defer paying K-12 education and welfare, the state also is preparing to begin issuing IOUs - in one to three weeks - to vendors, taxpayers and others doing business with the state, as it did last year to deal with the budget crisis.

State lawmakers, who face solving a $19 billion deficit, have still not agreed on a budget, which is now 55 days late.

The state first used the deferral law in July to delay $3.2 billion in payments to education and welfare until September. It was planning to use the law again in October to delay payments.

Instead, on Monday, the financial leaders said they were invoking a provision to allow them to fast track to September the payment deferral that had been planned for October.

"The decision for deferral acceleration was not taken lightly, given that these programs are already facing multiple hardships of potential budget reductions, payment deferrals last July and reduced month payments because of the late budget," wrote Controller John Chiang, Treasurer Bill Lockyer and Department of Finance Director Ana Matosantos.

However, they wrote, "the state has not enacted a timely budget that would provide valuable additional savings and receipts and allow for external borrowing." They also noted the financial duress counties and school districts are facing and wrote, "unfortunately, this accelerated deferral of state payments will further exacerbate that situation."

Paying state with IOUs

Concerns about the cash flow - and especially having enough money on hand to make scheduled payments on debt - have led to Chiang saying that IOUs could be issued in less than two weeks to people and businesses receiving tax refunds, college students seeking aid, low-income seniors and the blind and disabled, among others.

But on Monday, the state Senate unanimously approved a bill to allow people or businesses to use the IOUs, known officially as registered warrants, at full-face value for any debt owed to the state or a state agency.

The bill "addresses a genuine fiscal problem in the state and answers it with simple equity," said Sen. Mark Wyland, R-Solana Beach (San Diego County), who presented the bill on the Senate floor. Assemblyman Joel Anderson, R-Alpine (San Diego County), authored the bill.

While Chiang supports the measure, it is not clear whether Gov. Arnold Schwarzenegger will sign it, as his Department of Finance opposes it.

H.D. Palmer, spokesman for the finance department, said allowing California agencies to accept IOUs would diminish the cash-saving effect, because people would not be paying real money to the state.

"It would partially cancel out the benefits of the reason for doing IOUs in the first place," said Palmer, who addressed the issue of fairness by saying, "It's unfair to taxpayers to have the state in a position where we issue IOUs in the first place, and we hope we don't get there."

Both the IOUs and the deferred payments to schools and counties could be avoided if the Legislature passes and the governor signs a budget in the near future. Lawmakers and the governor still appear to be far apart on a spending plan for the fiscal year that began July 1.

Chronicle staff writers Justin Ho and Marisa Lagos contributed to this report.